The Fascinating Changing Definition Of Small Business By The Federal Reserve Board of Governors

A working paper recently released by the Federal Reserve Board of Governors revealed some sobering truths about the state of small business in America. Most prominently, in terms of both size and revenue, U.S. small businesses are smaller than is commonly realized. However, it’s also true that the nature of what is considered a small business has changed considerably in the last decade. Here’s a look at the working paper’s findings in the context of our current economic reality.

Small business are really small

According to “Small Businesses and Small Business Finance during the Financial Crisis and the Great Recession: New Evidence From the Survey of Consumer Finances”, small businesses across the United States are in worse shape now than they were before the recession. The report looks at data provided by 938 small business owners in 2007, the year preceding the recession, and 1,306 small business owners in 2010, the first year after the recession had officially ended. In that time, the median sales of U.S. small businesses fell by 33 percent. Profits fell by 52 percent, and 90 percent of small businesses didn’t earn more than $300,000 in 2010. More than 90 percent of small businesses operating in America also have fewer than 14 employees.

A matter of representation

While the working paper certainly paints a bleak picture, its findings should be taken with a grain of salt. According to a frequently asked questions page released by the U.S. Small Business Administration in 2012, there were 28 million small businesses operating in the United States. Given the amount of small businesses operating in the country at the time, a survey that only included a few thousand respondents can’t really be called representative of the entire small business owner population. In fact, a truly representative survey would need to include nearly twice as many respondents in 2007 and 2010 than participated in the Federal Reserve Board of Governors survey.

The changing nature of small business in America

Additionally, the Small Business Administration notes that 78.5 percent of small businesses in 2012 were non-employers. That suggests that many of the businesses surveyed by the Federal Reserve Board of Governors are independent contractors who are the sole proprietors of their small businesses. As such, it could be that the survey’s results were skewed by the growing number of U.S. workers who operate as independent contractors. For example, on demand transportation service Uber has a driver pool of 162,037, but all of those workers are independent contractors. According to Glassdoor, the average Uber driver makes around $35,000 a year, and that’s before taxes and maintenance costs are factored in. It’s possible that the declining profits for small business owners between 2007 and 2010 could be partially attributed to the rise of companies like Uber, which was founded in 2009. While it’s true that small businesses are smaller than is commonly recognized, it’s also true that the nature of small business ownership has changed considerably in the last decade.